Expectations and Stock Market in Nepal

This study examines the presence of both rational and adaptive expectations hypotheses in the Nepalese stock market by employing panel data analysis under the Fama–French three-factor model. Under the adaptive expectation hypothesis, the book to market equity is an essential determinant in the Nepalese stock market, and only the past 2-year information can explain investment decisions. Likewise, under the rational expectation hypothesis, the value factor, size factor and excess market return are important determinants during the investment decision. The past 3 years of information and the next 3 years of future information are necessary to estimate stock market return under rational expectation. Thus, this study reveals that the investment decision in the Nepalese stock market depends on the investor’s choice and preference upon the factors that are incorporated in the Fama–French three-factor model and the types of expectations in which the investors mostly believe.

Behavioural errors and stock market investment decisions: recent evidence from Pakistan

PurposeThis study examines the role of behavioural factors, such as confidence, optimism, pessimism and rational expectation, in affecting investment decisions in the Pakistani stock market.Design/methodology/approachUsing daily trading data of KSE-100 index from January 2012 to December 2015, different regression models, including descriptive statistics and stationarity tests, are performed.FindingsResults indicate that stock market trading has suffered from pessimistic behaviour of investors. In the first model, the authors find a positive sign of confidence and negative sign of optimism with the trading volume. The second model shows a positive role of confidence and rational expectations in affecting the trading volume in daily, Monday and Friday samples. The results of the third model show a negative sign of both optimism and rational expectation with the trading volume. Furthermore, the next model shows a negative sign of confidence combined with pessimism while testing their relationship with the trading volume. Finally, results of the final model suggest that optimism negatively affects the trading volume, and on the other hand, pessimism has a positive impact on the trading volume.Research limitations/implicationsThe method and empirical testing of behavioural biases and their relationship with economic variable used in this study seem to be a promising way to better understand the role of psychology in deriving financial decisions for academics and policymakers.Originality/valueThis study uses secondary data for measuring behavioural biases and decomposes the effect between rational expectation and behavioural biases.

Non-linear ADRL estimation of corruption and FDI inflow to Ghana

Purpose This paper aims to examine the effect of corruption on foreign direct investment (FDI) inflow in Ghana. This provides answers to the call for further empirical examination of the contextual impact of corruption on FDI inflow. Design/methodology/approach The study uses a non-linear ADRL time series econometric model to estimate data from the World Bank and the international country risk guide (1984–2019). Findings The study confirms the sand in the wheel and the grabbing hand hypothesis of the impact of control of corruption (CoC) on FDI both in the short and long run. However, degradation on the CoC index has a significant and more than a proportionate constraint on FDI inflows, while an improvement in CoC has no significant impact on improving FDI inflows. An explanation for this outcome was proposed after comparing this finding to a similar prior study with a Nigerian data set (Zangina and Hassan, 2020). The proposed explanation relied mainly on the rational expectation hypothesis and drawing elements of the efficient market hypothesis. FDI inflows do not react to outcomes or trajectories reasonably expected because such rationally expected future outcomes will have been modelled into existing FDI movement decisions. Instead, FDI flows react to “surprises” and often respond in a more than proportional manner. Practical implications Political leadership in Ghana should be conscious of the severe adverse effects of inaction or ineffective action in curbing corruption, leading to slippering in CoC rankings. In the case of Ghana, the dependence of FDI on CoC is even more pronounced as the other variables within the specified model show an insignificant impact on FDI. Additionally, admittedly aggregated cross-country data in econometric modelling is appealing and has some empirical basis, but these must not erode the relevance of country-specific studies as both are needed to support theorization. Originality/value The paper is among the first to test for the asymmetric relationship between corruption or its control thereof and FDI with a time series approach, and hence, the findings offer new insight.

Modern Financial Market Theory – A Critique Based on the Logic of Human Action

The modern financial market theory (MFMT) – based on the efficient market hypothesis, rational expectation theory, and modern portfolio theory – has become the standard approach in financial market economics. In this article, the MFMT will be critically ­reviewed using the logic of human action (or: praxeology) as an epistemological meta­theory. It will be shown that the MFMT exhibits (praxeo-)logical deficiencies so that it cannot provide investors with well-founded decision-making support in real-world financial markets.

Complex Dynamics in a Mixed Duopoly Game Based on Relative Profit Maximization

In this paper, the complex dynamic behavior of a mixed duopoly game model is studied. Based on the principle of relative profit maximization and bounded rational expectation, the corresponding discrete dynamic systems are constructed in the case of nonlinear cost function. In theory, the conditions for the local stability of Nash equilibrium are given. In terms of numerical experiments, bifurcation diagrams are used to depict the effects of product differences, adjustment speed, and other parameters on the stability of Nash equilibrium.

Estudio de opiniones sobre el desempeño económico: evidencia para los países de América Latina y el Caribe

Este trabajo estudia asociaciones entre opiniones sobre desempeño económico y flujos de información económica. Para 18 países de América Latina y el Caribe en el período 1995-2016, se encuentra 1) una asociación positiva entre un indicador de expectativas y el indicador de evaluaciones económicas esperadas, 2) controlando por las expectativas reportadas en el período t, información disponible en t-1 — factible de ser incorporada para formular expectativas— contribuye a explicar la evolución de las evaluación esperadas, 3) se evidencia instancias de sub y sobre-reacción y 4) no se evidencia heterogeneidad en las opiniones de individuos con diferentes características sociodemográficas e inclinación política. Los resultados 1, 2 y 3 son inconsistentes con los postulados de los modelos FIRE (full-information rational expectation).

The stabilizing effects of economic policies in Spain in times of COVID-19

Purpose This paper aims to analyse the stabilizing macroeconomic effects of economic policies during the COVID-19 crisis in Spain. Design/methodology/approach The contribution of the structural shocks that explain the behaviour of the main macroeconomic aggregates during 2020 are estimated, and the effects of economic policies are simulated using a dynamic stochastic general equilibrium (DSGE) model estimated for the Spanish economy. Findings The results highlight the importance of supply and demand shocks in explaining the COVID-19 crisis. The annual fall in gross domestic product (GDP) moderates at least by 7.6 points in the most intense period of the crisis, thanks to these stabilizing policies. Finally, the potential effects of Next Generation EU in the Spanish economy are estimated. Assuming that Spain may receive from the EU between 1.5 and 2.25 percentage points (pp) of GDP, activity could increase to between 2 and 3 pp in 2024. Originality/value To the best of the authors’ knowledge, the exercises and findings are original. All these results show the usefulness of a DSGE model, such as the estimated rational expectation model for Spain, as a practical tool for the applied economic analysis, the macroeconomic assessment of economic policies and the understanding of the Spanish economy.

Does Time Varying Risk Premia Exist in the International Bond Market? An Empirical Evidence from Australian and French Bond Market

The presence of risk premium is an issue that weakens the rational expectation hypothesis. This paper investigates changing behavior of time varying risk premium for holding 10 year maturity bond using a bivariate VARMA-DBEKK-AGARCH-M model. The model allows for asymmetric risk premia, causality and co-volatility spillovers jointly in the global bond markets. Empirical results show significant asymmetric partial co-volatility spillovers and risk premium exist in the bond markets. The estimates of the bivariate risk premia show bi-directional causality exist between the Australia and France Bond markets. Overall results suggest nonexistence of pure rational expectation theory in the risk premium model. This information is useful for the agents’ strategic policy decision making in global bond markets.